1. The Fed and its Balance Sheet
Since 2009, bond purchases by the Fed have driven rates to historic lows. The money supply has ballooned. Primary liquidity of corporate bonds has been significantly reduced. These are massive structural changes to our bond markets.
The 2007-2009 financial crisis has had many unintended consequences. First, to lend liquidity into the financial system and to help lower bond prices and interest rates in an effort to stimulate our economy, the U.S. Federal Reserve Banks (Fed) started buying bonds. With these purchases, the Fed’s balance sheet ballooned to almost four and a half trillion dollars. Over 41% of this are bonds backed by U.S. household mortgages. Today about 12% of the country’s household mortgages (over $1.7 trillion), and $2.5 trillion of our country’s treasury bonds, are now owned by the Fed, our Central Bank.
Interested in Part 2? Stay tuned for next week's post continuing the state of the bond markets and facts to consider.
